Billionaire Investor Warns: What’s Ahead Is Worse Than a Recession
Renowned British investor Jeremy Grantham said recently, “The trouble with this bubble is it’s an everything bubble.”
I watch and research macro investors and so-called money experts, and one thing is for certain — they’re as divided as an American election.
No one knows what will happen. But as Grantham says, “Investing is not about precision, but probabilities.”
He says he thinks of himself as a “realist trying to see the world as it is and not the way I’d like it to be. And sometimes, I succeed, and sometimes I fail in that”.
The 84-year-old seasoned pro, famous for studying market bubbles, believes there’s a 70% chance we’re heading for a recession that could result in a further 50% correction of the S&P 500.
I’ve yet to see a single money manager without a rap sheet of wrong calls and, with that, a crowd of critics with pitchforks at the gate.
His cynics characterise him as a “Perma-bear” (permanently bearish), a label he playfully dismisses with a twinkle in his eye. Instead, he prefers “bubble historian.”
In 1999, he was fired, and it ended up putting him on the map.
During the dot-com boom and bust, he began withdrawing money from growth stocks a tad early when the market “kept going up and up and up”, and his client base lost their minds.
Jeremy Grantham — Source
“We fought the bubble all the way but were horrifically too early. That was a brutal two years. The market moved significantly from its all-time high in early ’98. It went straight up until March of 2000, and our clients disapproved of us being early and, to a very considerable degree, fired us.
People pulled money out, and then when the market finally did have its collapse, the so-called dot-com bubble burst.
Question — So people called up and said, ‘We’re sorry, can we give you our money now?’ Answer — No solitary person who fired us returned for the same product they fired us for.
His fund's performance ended up being as resilient as an old boot during those turbulent times. They avoided losses in 2000 and 2001 and narrowly escaped losses in 2002.
All while the entire market fell like a broken elevator.
Despite the S&P experiencing a 50% downturn, the fund saw three consecutive years of growth during that period, which bolstered the firm’s reputation and attracted substantial investment.
Source — Bloomberg
Not everyone agrees about the state of the market.
The most frequently discussed topic I encounter daily is whether we’re on the brink of a recession or whether we’ll narrowly escape it.
The market bubble guru believes it would be unique if we didn’t have an extended problem with the economy—“This tech bubble bursting is far from over—what happens after the bubbles break? There’s always a recession pretty quickly, and people never get it. People never forecast it.”
The Federal Reserve, clearly reading from a different hymn sheet, dropped their forecast for a recession altogether because the economy, as they say, is “resilient”.
Jerome Powell — Source
“So the staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.
The Fed has reduced inflation from 8.2% to 3.7% in the last year, and unemployment is at 3.8%, the lowest level since the 1970s, below its target of 5%.
Hedge fund manager and popular television personality Jim Cramer best summed it up when he said, “If I speak in no gibberish, this economy is so hard to kill.”
Source — Fred.org: Unemployment rate
Grantham says it’s simple — “Low interest rates push up asset prices, and higher rates push them down. And we’re now in an era that will average higher rates than we had for the last ten years.”
Jeremy Grantham — Source“The Fed’s record on these things is wonderful. It’s almost guaranteed to be wrong. They have never called a recession, and particularly not the ones following the great bubbles. They prided themselves on stimulating the bubbles — they took credit for the beneficial effect of higher asset prices on the economy. They have never claimed credit for the deflationary effect of asset prices breaking, and they always do.
One hidden indicator that fools people during every market bubble.
It all feels like reading a map in a foreign language.
The stock market rallying in the wake of a banking crisis, a war in Europe, sky-high interest rates and inflation rates that have your disposable income at gunpoint.
According to Grantham’s data, it’s pretty standard to see a rally concentrated amongst blue-chip stocks ahead of an inevitable crash.
One vital indicator of a market top is a “divergence in performance,” i.e. when the performance of certain stocks is headed in opposite directions.
He says there are many historical references to show during market bubbles, “blue chips initially outperform”, which convinces people everything is hunky dory.
Eight of the top 10 performing stocks are tech giants promising a future of AI. AI accounts for 28.30% of the market gains, which is heavily concentrated.
J. Grantham says, which I agree with, that this is an obvious indicator that once the AI speculation softens, there’ll be significant downward pressure on stock market prices.
Source — www.investopedia.com
Divergence — i.e. the separation of performance between “Junior” performing stocks and blue chips, is an obvious sign of a top signal, according to Grantham.
Today, we have an AI bubble, with companies like Apple, Microsoft, and Amazon accounting for 15% of the market's gains.
The bubble historian says the same happened in “1929, 1972 and 2000 — the beautiful Great Tech bubble.”
After consuming more than 20 hours of his content, I can tell with certainty my fellow Brit revels in market bubbles — you can see in his facial expressions that it’s a true delight. Lol.
But this AI bubble is confusing people.
Jeremy Grantham — Source
“You get this divergence where, at the beginning of the bubble, the speculative leaders take a hit, sometimes a significant one, while the big blue chips keep climbing.
People wonder, ‘What are you talking about? It doesn’t look like a bear market — the S&P is up 20%. The S&P was up a lot more than 20% in 1929. But the low-priced index, the speculative stocks, were down 35% to 40% the day before the 1929 crash. The low-priced index had even been up 85% in 1928.
Nothing resembled that divergence, where the high-beta stocks plummeted, and blue chips skyrocketed, until now.
According to Grantham’s investment firm whitepaper on recessions, high-risk stocks often take a nosedive quickly during economic downturns.
Looking at the past 55 years, value stocks have fared better during recessions, while growth stocks tend to hit a rough patch.
Growth stocks are associated with companies set for higher revenue expectations and earnings growth, often in innovative industries, while value stocks involve established companies seen as undervalued with stable business models.
Value stock performance is indicated by the purple bar below.
Source — GMO White paper on recessions
It’s a head fake.
GMO said this cycle would be notably different and could be worse than an ordinary recession.
“The sharp increase in interest rates, the likely persistence of inflation, and a corporate tax change in the US that seems to have gotten less notice than we believe it deserves. Those factors make us believe that a recession, when it occurs, will be harder to cushion and that highly levered corporations will fare worse in a recession than investors might assume from past cycles”.
Grantham sees AI as the party spoiler amidst already challenging circumstances, disrupting the deflation process from the tech bubble of 2021.
Jeremy Grantham — Source
“I wish it hadn’t arrived just now because the end of these great bubbles is hard enough without the elements of new bubbles to scramble the thinking.
And that’s what has happened here.
A dozen giant American stocks have had a hell of a run on the back of AI, which has undoubtedly created the impression that it’s game over (for a recession).
The problem is prices are still incredibly high, and basically, the economy is beginning to unravel, and it’s a head fake, but it’s a hell of a head fake.
Final Thoughts
Grantham says, “Humans always look for better outcomes than historically typical.”
I agree with this sentiment, except we now have a magic genie in the form of a money printer, which seemingly never runs out of wishes.
While he denies being a doomsday fearmonger, he does say, “Just persuade yourself that the world is typically wrong — the world is typically too optimistic, too willing to go with the group.”
I’m not a short-term trader, but the classic saying, “Time in the market beats timing the market”, is a truism I’ve hung my hat on.
The data never lies.
Using $6,400, which is, on average, the value of two months' salary in the USA, if you invested a decade ago in Apple stock when people were saying the stock was high, you’d have returned profits of $43,175.
Amazon's market cap rose from around $100 million in its first bull run during the dot-com bubble in 2000 to over $1.3 trillion today.
That’s an increase of 1.3 million per cent (1,300,000%).
It took ten years and two recessions for those who remained invested in Jeff Bozzo’s company (since the bubble’s peak) to see significant gains, but their patience was handsomely rewarded.
The point of difference is not your ability to be Nostradamus but to thoughtfully pick stocks you believe in long-term.
People like Grantham who dedicate their lives to a singular skill set are often right.
One thing is certain.
How bad a recession will be is unknown.
